Objective

Author, in this article, analyses a supreme Court decision in the case of Northern Operating system dated 19-May-2022 which has un-settled an otherwise settled tax treatment of secondment of employees under both direct and indirect tax laws. 

Structure-:

The article gives authors own analysis. This article is based on a judicial pronouncement and is divided into following parts.

Part – I – case in brief PART – II – case in detail PART – II – case in etail…continued PART – II – case in detail…continued
Background Armory required The impugned order of CESTAT  Import of services
Take away Point  Legislative background Happenings before Supreme court Service PE
Citation of the case  Judicial pronouncements  Contention of revenue  Visa classification
Entering the subject Events not considered  Contention of Assessee  Social security Taxes
Question posed Facts of the case Analysis and conclusion
Answer given by SC  The agreements etc. Impact under other Laws
Author’s opinion Order of Assessing officer-:  –à

Background

Taking advantage of the globalized economy, and having regard to locational advantages, the overseas group company enters into agreements with its affiliates or local companies. The objective is to optimize the economic edge (be it manpower or other resources availability) to perform the specific tasks given it, by the overseas company.

As part of this agreement, a secondment contract is entered into, whereby the overseas company’s employee or employees, possessing the specific required skill, are deployed for the duration the task is estimated to be completed in.

This phenomenon has ramifications under both tax laws i.e. direct tax (income tax) and indirect tax (service tax / Goods and services tax).

Take away point

In case of secondment of employees, it is a simple transaction of man-power supply by one entity to another.

It is so because the other entity does not become either employer or economic employer of seconded employee.

All the consequential tax treatment under direct and /  or indirect tax law will take place accordingly.

Supreme court has, in para 60, over-ruled the decision in the case of Volkswagen and Computer Sciences Corporation emerging from CESTAT, decision which was contrary to what has been held in this decision.

Part – 1 gives a summary of the judgement to enable the reader to appreciate the analysis of the subject.

Part – 2 gives a detailed analysis.

PART – I Case in brief

Citation of the case

The Commissioner of Central Excise and Service Tax v M/ Northern Operating Systems Pvt Ltd Civil Appeal No. 2289-2293 OF 2021 dated 19-May-2022 decision of Supreme Court, Larger bench.

The above appeal is against the judgement of CESTAT in the case of the Commissioner of Central Excise and Service Tax v M/s. Northern Operating Systems Pvt Ltd in-Service Tax Appeal (STA) Nos. 22573-74/2014; STA No. 21502/2017, Service Tax / CROSS / 21077 / 2017 and Service Tax / cross / 20255/2018. Dated 23.12.2020.

Entering the subject

An overseas company has seconded its employee to its Indian associated entity (AE) for making available the skillset of the said employee. The Indian AE has reimbursed the Overseas company on generally “at cost” basis.

1. Various judicial forums have consistently taken a stand that in case of secondment of employee to another company, the other company becomes economic employer of the employee, and its consequential treatment follows.

2. The decisions contain under both tax laws i.e. direct tax and indirect tax laws.

3. The cost is reimbursed on a cost-to-cost basis,

4. To high-light a fact, once the relationship is concluded to be of employer-employee, there is a substantial difference in tax treatment under both the direct tax and indirect tax laws.

Questions posed

Whether, on facts and in circumstances of the case and in law, the secondment of an employee, amounts to manpower supply.

A corollary question to be considered is as to exactly who the employer is 

Answer 

The phenomenon of secondment of employee amounts to rendering of manpower recruitment and supply services by the overseas entity, in regard to the employees it seconded to the assessee, for the duration of their deputation or secondment.

Author’s opinion

This larger bench of Supreme Court has over-ruled two of its own judgements citing the same as being unreasoned and of no precedential value

1) CCE Vs Computer Sciences Corp. India Pvt. Ltd. (2015(37) STR 62)

2) Volkswagen India Pvt. Ltd. Vs Commissioner of C. Ex. (2014(34) STR 135)

This judgement has addressed much deeper a question than merely tax treatment of secondment of employee by answering as to who the employer is. Para 58 of the judgement reads as

58. One of the arguments of the assessee was that arguendo, the arrangement was “manpower supply” (under the unamended Act) and a service [(not falling within exclusion (b) to Section 65 (44)] yet it was not required to pay any consideration to the overseas group company. The mere payment in the form of remittances or amounts, by whatever manner, either for the duration of the secondment, or per employee seconded, is just one method of reckoning if there is consideration. The other way of looking at the arrangement is the economic benefit derived by the assessee, which also secures specific jobs or assignments, from the overseas group companies, which result in its revenues. The quid pro quo for the secondment agreement, where the assessee has the benefit of experts for limited periods, is implicit in the overall scheme of things.

With utmost humility, the author is not in agreement with the cryptic manner in which the above two important supreme court judgements have been over-ruled. At the same time, if at all the larger bench had to reset the taxation of phenomenon of secondment, it should have over-ruled the decision in the case of  Eli-lilly – refere later in the article prescribing treatment under direct tax laws.

PART – II – case in detail

Armory required

The judgement has made extensive reference to judgements under both Direct tax and indirect tax laws.

The question posed is that of levy of service tax. Thus, one should be aware of background legislative enactments and judicial pronouncements under direct tax law and indirect tax laws.

Legislative Background-:

Judicial Pronouncements-:

Legislative Background

Generally, the facts of the case precede the legislative background but here it is a case under the service tax law that will have implications under the income tax Act as well. Thus, it is necessary to give a brief law governing the case in hand.

The Finance Act, 1994(chapter V) (the service tax law, for short)

the proviso to Section 73 (1) read with Section 66A of the Act are machinery provisions for collection and recovery of taxes

Section 65 – definitions –

(105) “taxable service” means any service provided or to be provided, -(k)to any person, by a manpower recruitment or supply agency in relation to the recruitment or supply of manpower, temporarily or otherwise, in any manner;

Explanation. — For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, recruitment or supply of manpower includes services in relation to pre-recruitment screening, verification of the credentials and antecedents of the candidate and authenticity of documents submitted by the candidate; 

Circular F.No. B1/6/2005-TRU dated 27.07.2005 

Scope of ‘Manpower Recruitment or Supply Agency’ service 

22.3 In these cases, the individuals are generally contractually employed by the manpower supplier. The supplier agrees for use of the services of an individual employed by him to another person for a consideration. The terms of the individual’s employment may be laid down in a formal contract or letter of appointment or on a less formal basis. What is relevant is that the staff are not contractually employed by the recipient but come under his direction.” 

Amendment – July 2012

Further, for the period post July 2012, the nomenclature bases classification of service tax was done away with and ‘service’ was specifically defined under Section 65B (44) of the Finance Act, 1994. Clause 44 of Section 65B read as:

(44) “service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include— 

(a) an activity which constitutes merely,— 

(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or 

(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or 

(iii) a transaction in money or actionable claim;

 (b) a provision of service by an employee to the employer in the course of or in relation to his employment;

 (c) fees taken in any Court or tribunal established under any law for the time being in force.

Judicial Pronouncements

Interpretation regarding manpower recruitment or supply agency service

In order to classify any service under the manpower recruitment or supply agency service the following conditions needs to be satisfied:

i. The agency must be any person

ii. It must be engaged in providing a specified service

iii. The specified service is recruitment or supply of manpower

iv. The service can be provided ‘temporarily or otherwise’

v. The service may be provided directly or indirectly

vi. The service may be provided in any manner

vii. The service must be provided to any other person

Citation Director Income Tax v. M/S Morgan Stanley & Co. Inc(2007) 7 SCC 1
Context whether an arrangement involving secondment, in the context of liability to income tax.
Obser-vation “17. As regards the question of deputation, we are of the view that an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with MSCo the said company retains control over the deputationist’s terms and employment. The concept of a service PE finds place in the UN Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge.

18. Applying the above tests to the facts of this case we find that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstances, generally, MSAS makes a request to MSCo. A deputationist under such circumstances is expected to be experienced in banking and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCo as he retains his lien..”

Citation Commissioner of Central Excise v. M/s Computer Science Corporation India Pvt. Ltd. 2015 (37) S.T.R. 62 (All.) = 2014-TIOL-1896-HC-ALL-ST
Context
Obser-vation “8.In the present case, the Commissioner clearly missed the requirement that the service which is provided or to be provided, must be by a manpower recruitment or supply agency. Moreover, such a service has to be in relation to the supply of manpower. The assessee obtained from its group companies directly or by transfer of the employees, the services of expatriate employees. The assessee paid the salaries of the employees in India, deducted tax and contributed to statutory social security benefits such as provident fund. The assessee was also required to remit contributions, which had to be paid towards social security and other benefits that were payable to the account of the employees under the laws of the foreign jurisdiction. There was no basis whatsoever to hold that in such a transaction, a taxable service involving the recruitment or supply of manpower was provided by a manpower recruitment or supply agency. Unless the critical requirements of clause (k) of Section 65(105) are fulfilled, the element of taxability would not arise.”

The Hon’ble High Court of Allahabad has dealt with the same issue and has held as under: 

“8.In the present case, the sioner clearly missed the requirement that the service which is provided or to be provided, must be by a manpower recruitment or supply agency. Moreover, such a service has to be in relation to the supply of manpower. The assessee obtained from its group companies directly or by transfer of the employees, the services of expatriate employees. The assessee paid the salaries of the employees in India, deducted tax and contributed to statutory social security benefits such as provident fund. The assessee was also required to remit contributions, which had to be paid towards social security and other benefits that were payable to the account of the employees under the laws of the foreign jurisdiction. There was no basis whatsoever to hold that in such a transaction, a taxable service involving the recruitment or supply of manpower was provided by a manpower recruitment or supply agency. Unless the critical requirements of clause (k) of Section 65(105) are fulfilled, the element of taxability would not arise.”

Citation Dharangadhara Chemical Works Ltd. v. State of Saurashtra 1957 SCR 158  this court observed as follows:
Context who is the employer, and whether the relationship between an employee and another, is one of master servant, or whether there is an underlying contract for service, by which the real employer, lends the services of his employee to another.
Obser-vation “The principle which emerges from these authorities is that the prima facie test for the determination of the relationship between master and servant is the existence of the right in the master to supervise and control the work done by the servant not only in the matter of directing what work the servant is to do but also the manner in which he shall do his work, or to borrow the words of Lord Uthwatt at p. 23 in Mersey Docks and Harbour Board v. Coggins & Griffith (Liverpool) Ltd. [(1952) SCR 696, 702] “The proper test is whether or not the hirer had authority to control the manner of execution of the act in question.”

Citation D.C. Dewan Mohideen Sahib and Sons v. Secretary, United Beedi Workers’ Union 1964 (7) SCR 646
Context sample agreement which disclosed the facts of the case before it, and, for the first time, held that the “control” test is not necessarily determinative to discern the real employer
Obser-vation There is in our opinion little doubt that this system has been evolved to avoid Regulations under the Factories Act. Further there is also no doubt from whatever terms of agreement are available on the record that the so-called independent contractors have really no independence at all. As the appeal court has pointed out they are impecunious persons who could hardly afford to have factories of their own. Some of them are even ex-employees of the Appellants. The contract is practically one-sided in that the proprietor can at his choice supply the raw materials or refuse to do so, the so-called contractor having no right to insist upon the supply of raw materials to him. The so-called independent contractor is even bound not to employ more than nine persons in his so-called factory. The sale of raw materials to the so-called independent contractor and resale by him of the manufactured bidis is also a mere camouflage, the nature of which is apparent from the fact that the so-called contractor never paid for the materials. All that happens is that when the manufactured bidis are delivered by him to the Appellants, amounts due for the so-called sale of raw materials is deducted from the so-called price fixed for the bidis. In effect all that happened is that the so-called independent contractor is supplied with tobacco and leaves and is paid certain amounts for the wages of the workers employed and for his own trouble. We can therefore see no difficulty in holding that the so-called contractor is merely an employee or an agent of the Appellants as held by the appeal court and as such employee or agent he employs workers to roll bidis on behalf of the Appellants. The work is distributed between a number of so-called independent contractors who are told not to employ more than nine persons at one place to avoid Regulations under the Factories Act.”

Portion of Income Tax Law

Citation Director Income Tax v. M/S Morgan Stanley & Co. Inc (2007) 7 SCC 1
Context whether an arrangement involving secondment, in the context of liability to income tax.
Obser-vation “17. As regards the question of deputation, we are of the view that an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with MSCo the said company retains control over the deputationist’s terms and employment. The concept of a service PE finds place in the UN Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge.

18. Applying the above tests to the facts of this case we find that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstances, generally, MSAS makes a request to MSCo. A deputationist under such circumstances is expected to be experienced in banking and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCo as he retains his lien..”

Citation CIT v EliLilly & Co. (India) (P.) Ltd.
Context Whether with-holding tax liability arises on Indian entity u/s 192 as employer
Obser-vation 1. In Eli Lilly (supra) the appellant was incorporated in India under the Companies Act, 1956 and was a joint venture between M/s Eli Lilly, Netherlands B.V. and Ranbaxy Laboratories (Ltd.). The foreign partner had seconded four expatriates to the Indian joint venture. The employees, however, continued to remain on the rolls of the foreign company. They received home salary outside India from the foreign partner. The joint venture company deducted tax under Section 192(1) in respect of the salary paid by it to the expatriates in India, and did not deduct tax in respect of the home salary paid by the foreign company. This court held that the provisions of the tax deduction at source (TDS) under the Income Tax Act, were applicable in relation to the salary paid by the foreign employer.

Events not considered

(being irrelevant for this article)

The author has skipped the following topics / events;

1. The fact that there were two separate orders of two assessing officers (i.e. commissioners)

2. Issue of show cause notices Dated 04.2012; (for the period October 2006 – March 2011), 19.10.2012 (for the period April 2011 to March 2012), 07.05.2014 & 26.11.2015 (for the period April 2012 to September 2014).

3. eligibility of CENVAT credit within the scope of Rule 3(1) of the CENVAT Credit Rules, 2004 (hereafter “CENVAT Rules”)

4. Correctness or otherwise in disclosure in return of service tax namely ST-3

5. One assessing officer decided the matter in favour of the assessee whereas another decided against the assessee.

Facts of the case

1. The assessee was registered with the revenue, as a service provider under the categories of “Manpower Recruitment Agency Service”, “Business Auxiliary Service”, “Commercial Training and Coaching Service”, “TTSS”, “Telecommunication and Legal Consultancy Service” etc., under the Finance Act, 1994 (hereafter “the Act”). Following an audit of the records by the revenue’s officials, proceedings were initiated against the assessee alleging non-payment of service tax concerning agreements entered into by it with its group companies located in USA, UK, Dublin (Ireland), Singapore, etc. to provide general back- office and operational support to such group companies.

The relevant terms of the agreement to understand the activity are as follows:

a) When required Appellants requests the group companies for managerial and technical personnel to assist in its business and accordingly the employees are selected by the group company and they would be transferred to Appellants.

b) The employees shall act in accordance with the instructions and directions of Appellants. The employees would devote their entire time and work to the employer seconded to.

c) The seconded employees would continue to be on the payroll of the group company (foreign entity) for the purpose of continuation of social security/retirement benefits, but for all practical purposes, Appellants shall be the employer. During the term of transfer or secondment the personnel shall be the employee of Appellants. Appellants issue an employment letter to the seconded personnel stipulating all the terms of the employment.

d) The employees so seconded would receive their salary, bonus, social benefits, out of pocket expenses and other expenses from the group company.

e) The group company shall raise a debit note on Appellants to recover the expenses of salary, bonus etc. and the Appellants shall reimburse the group company for all these expenses and there shall be no mark-up on such reimbursement.

The agreements and their relevant stipulations 

The reason for re-producing the agreement portion etc. is to enable reader understand the manner in which the secondment of employee takes place.

2. The first in the series of relevant documents, is the Services Agreement. It was entered into between Northern Trust Company (the overseas group entity, known hereafter as “NTC”) and the assessee. In terms of the services agreement (dated 09.2006), it was acknowledged that the assessee was engaged in providing “incidental back-office support services” which it agreed to provide to NTC. By clause 2, it was agreed that:

“2. Consideration: The consideration for performance of the services shall be paid on a mutually agreed basis as described in Attachment 1

By clause 8, the services to be performed by the assessee were also set out in Attachment 1. Their description reads as follows:

“Service: IT enabled services supporting back-office banking and related operations” 

The part relating to consideration, i.e., fee (payable to the assessee) reads as follows:

“Beginning September 1 2006, the assessee shall charge Northern Trust for all actual costs incurred in providing the agreed services, plus a mark up of 15.0%. …” 

3. The provisions of the secondment agreement, entered between NTMS and the assessee, to the extent relevant read as follows:

“SECONDMENT AGREEMENT

This SECONDMENT AGREEMENT (this “Agreement”) is entered into and effective April 1, 2007 by and between: 

Northern Trust Management Services Ltd a company incorporated under the laws of the United Kingdom with its principal office located at 50 Bank Street, London, E14 5NT, (hereinafter referred to as “NTMS’),

and

Northern Operating Services Private Limited, a company organised and existing under the laws of India and having its principal office at RMZ Ecospace Campus 1C, Sarjapur Outer Ring Road, Bangalore-5600037, India (hereinafter referred to as “the assessee”). 

WITNESSETH: 

xxxxxx xxxxxx Xxxxxx

 ARTICLE I

SECONDMENT 

the assessee shall request NTMS to provide employees (“the Employees) who have the expertise required by the assessee. In order to help NTMS make the selection, the assessee shall provide NTMS with a description of the skills and competencies required by the assessee. Based on the list provided by ŅOS, NTMS shall identify the people and select the employees. 

NTMS hereby agrees to second the employees to the assessee for time period(s) (“the Secondment Period”) with commencement dates and completion dates, as reflected in Appendix I and Appendix II of this agreement. Appendix I and Appendix II will be updated from time to time to reflect any changes made as a result of Article II (E) or Article II (G) or Article II (H).

The employees seconded to the assessee shall continue to be remunerated through the payroll of NTMS only for the purpose of continuation of social security, retirement     and     health     benefits     but     for      all      practical purposes, the assessee shall be the employer. 

ARTICLE II

DUTIES AND OBLIGATIONS

NTMS shall ensure that:

(A) The Employee shall act in accordance with the instructions and directions of  the assessee.

(B) During the Secondment Period, the Employees shall devote the whole of their time, attention and skills to the duties of their

(C) The employees  shall   be   reportable   and   responsible   to   the assessee.

(D) All the responsibility and risk for work undertaken by the Employees will remain with the assessee during the Secondment

(E) the assessee shall have the right, at any time, to approve or reject the Employee selected for secondment and to request from NTMS the replacement of any Employees who, in the opinion of the assessee, are not qualified or do not meet the requirements  necessary        to        fulfil        their        Secondment, xxxxxx   xxxxxx   xxxxxx

(H) All terms and conditions of employment with NTMS will cease during the Secondment Period. The terms and conditions of employment with the assessee, as stated in the employment agreements between the Employees and the assessee will remain       in       force        during        the        Secondment        Period. 

xxxxxx xxxxxx Xxxxxx

ARTICLE III

DUTIES AND OBLIGATIONS OF the assessee

the assessee reimburse expenses paid by NTMS as follows:

During the Secondment Period, as defined in Appendix I and Appendix II hereto, the assessee shall reimburse NTMS for the following amounts (collectively the “Reimbursable Expenses”):

(1) All remuneration of the Employees, including but not limited to, salary, incentives and employment benefits of the Employees paid by NTMS; and

(2) All out-of-pocket expenses incurred by the seconded Employees and reimbursed by NTMS, including but not limited to, business travel expenses and other miscellaneous expenses, directly related to the secondment of the

It is specifically agreed that the payments by the assessee to NTMS shall be limited to actual costs incurred, including administrative costs, as may be reasonably attributable to payroll services provided by NTMS. Administrative cost for this purpose would be 1% of actual cost incurred. The parties agree that during the Secondment Period, the role of NTMS is restricted to that of a payroll services provider only. 

ARTICLE VII

INDEMNIFICATION

NTMS will endeavor to provide appropriate qualified Employees for secondment under this Agreement. Nothing in this Agreement, shall be construed as a warranty of the quality of the seconded Employees. 

Further the assessee shall hold NTMS harmless and shall indemnify NTMS from all claims, demands, suits, actions, loss, damage, costs and expenses (excluding consequential loss or damage) to which NTMS may become liable in respect to any and all loss, damage or injury as a result of any act or omission by the seconded Employee.

The master services adverted to earlier, between NTC (group company) and the assessee, reads as follows:

THIS MASTER SERVICES AGREEMENT (“this Agreement”) is dated February 12th, 2009 and made 

BETWEEN: 

(1) THE NORTHERN TRUST COMPANY,  a   company   established under the laws of the State of Illinois in the United States of America, whose principal place of business in the S.A. is at 50 South LaSalle Street, Chicago 60603, Illinois, U.S.A. (“TNTC Chicago”); and

(2) NORTHERN OPERATING SERVICES PRIVATE LIMITED, a company established under the laws   of   India,   whose principal   place of business in India is at 2nd Floor, RMZ Ecospace Campus 10, Sarjapur   Outer   Ring   Road,   Bangalore 560037,    India    (“the assessee”). TNTC Chicago and the assessee are hereinafter collectively referred to as “Parties” and individually as “Party”.

 3. Duties of the assessee

 3.1 the assessee agrees that it will use reasonable efforts to ensure that the Services contemplated under this Agreement are performed by the assessee promptly and to the best of its ability and in accordance with the Standard of TNTC Chicago agrees that it will provide proper information and assistance to the assessee by making reasonable efforts   in order for the assessee to have access to the data and assistance required in order to properly carry out the duties contemplated by this Agreement to be performed by it.

 3.2 It is understood and agreed  that   the   Services   performed hereunder by the assessee for TNTC Chicago shall be carried out in accordance with policies, authorities, and procedures as are or may be established and authorized by TNTC Chicago. 

xxxxxx xxxxxx Xxxxxx

SCHEDULE 3 — FEES & DETERMINATION THEREOF 

1. The fees for the Services shall be payable by TNTC Chicago for the Services rendered by the assessee for TNTC Chicago.

2. The fees for the Services performed by the assessee under the Agreement shall be the Total Service Costs (as defined below) incurred by   the assessee for rendering the Services plus a mark-up on the Total Service Mark-up shall be 15% on Total Service Costs for the period of agreement. This shall be revised from time to time depending upon the market conditions and transfer pricing requirements. 

xxxxxx xxxxxx Xxxxxx

 The letter of understanding issued to one of the seconded employees, to the extent it is relevant, reads as follows:

“LETTER OF UNDERSTANDING

August 6, 2012 Dear Brian Ovaert,

This letter of agreement between Northern Operating Services Private Limited (the assessee) and Brian Ovaert confirms our mutual understanding of the terms and conditions applying to your employment with the Company while on international assignment to Northern Operating Services Pvt. Ltd. in the position of Regional Executive reporting directly to the assessee 

xxxxxx xxxxxx Xxxxxx

Board of Directors.

Duration 

The effective date of your international assignment is July 1, 2012, and it is expected that your assignment to and employment with the assessee will be 12 months in duration. At its conclusion, repatriation will be in accordance with the Global Mobility Repatriation Policy. Alternatively, by mutual agreement, your assignment to   and employment with the assessee may be extended. Should this be the case, an extension letter will be entered into between the assessee and yourself.

However, you have the right to terminate your employment at any time for any reason and the Company has the same right. 

xxxxxx xxxxxx Xxxxxx

Vacation / Local Public Holidays  Your annual

vacation entitlement is currently 20 days. You will be entitled to all local public holidays observed by the assessee. However, you must use vacation days to observe any United States public observed holiday that is not observed in the assessee. A list of the assessee’ public holidays may be found on My Place.

Home Leave During your assignment, you will be provided the following Home Leave Options:

You may elect to receive an annual home leave allowance for each member of your immediate family to Chicago for two home leave trips.

This allowance is non-accountable and is intended to cover airfare and ground transportation to and from the airports in your home and at Bangalore, India.

If you prefer, you may book your travel directly through BCD Travel for direct reimbursement according to Northern’s Travel Policy.

In the final year of your assignment, home leave entitlement will continue if you are on assignment at least six months from your assignment anniversary date. You will be granted an additional 2 travel days (round trip) in any year in which you are entitled to home leave You should plan to address all of your repatriation matters during your final annual home leave visit.

All accommodation and car rental costs during home leave are your personal responsibility. 

xxxxxx xxxxxx Xxxxxx

 Housing

Northern Trust will make   arrangements   directly   with   the landlord/owner of the property of your choice in Bangalore, India. Do not enter into personal agreements. You   should   aim   to   identify and select a property that will suit you and your family for the duration of your assignment (taking into account schools/location). The monthly rent of your selected accommodation should   be   limited   to   INR 366,700. In addition, an annual utility allowance of (NR 397,500 will be paid to you. This allowance will cover water, sewer, gas, oil, electricity, basic telephone service, basic satellite/cable TV service and initial set-up for broadband service, but will exclude the cost of monthly premium satellite/cable TV, monthly telephone calls, and monthly broadband service.

Packing/Shipping/Storage

A moving firm designated by Northern Trust will ship your household goods via air and ocean freight. Insurance at a reasonable   value amount on both of these shipments will also be covered by the Company. Household goods that are not shipped to Bangalore, India will be stored if required for the duration of your assignment and the costs of storage and Insurance premiums will be met. You should note that certain items may be excluded from   shipment   and storage.   You will be advised if this is the case. Your air shipment allotment Is 600 lbs. for you and your spouse.

Furniture Allowance in Lieu of Shipment

In lieu of shipping some or all of your current household furnishings via ocean freight to Bangalore, India, you can receive a “furniture allowance” which would be an amount based on country norms. Your furniture allowance is USD $9,000. 

xxxxxx xxxxxx Xxxxxx

 Personal Vehicle Disposal

You will be reimbursed for a loss you incur when selling your personal vehicle(s), upon initial transfer to Bangalore, India up to a maximum of US$5,000 for each car. Details of the car losson-sale policy are described in the Global Mobility Policy.

R&R Trips

You will be provided two (2) R & R trips in a 12 month period for you and your spouse to leave Bangalore, India. These trips are in addition to your two annual home leave trips. The R & R allowance is non- accountable and is intended to assist with hotel and airfare costs. Providing an allowance allows you the flexibility to choose the length and destination of your R & R trips. The allowance per trip for your family size of 2 is USD$2,100. 

xxxxxx xxxxxx Xxxxxx

Base Salary and Bonus

Effective with your assignment in Bangalore, India your base salary will be USD $330,000. 

Mobility Allowance

You will be paid a one-time sum of USD $7,500 prior to your departure by deposit to your checking account. The Mobility Allowance is specifically compensating you for any incidental additional expenses incurred as a result of your assignment.

Hardship Allowance

You will be paid a hardship allowance of 20% of your base salary during your assignment to Bangalore, India. This amount may be adjusted during your assignment as independent data is updated. Any changes will be communicated prior to implementation. This amount will be paid semi-monthly along with your normal salary.

Servant Allowance

While on assignment in Bangalore, India, it may be necessary to have the use of household servants to maintain a household, ship for groceries, perform daily living duties, etc. An allowance of $2,000/yr. will be paid to you by Brookfield Global Relocation Services to facilitate this.”

4. The nature and contents of the agreements, are discernible in their description, extracted from the impugned order – where the assessee has been referred to as “the appellant” by the CESTAT – which is as follows:

“The relevant terms of the agreement to understand the activity are as follows:

a) When required Appellants requests the group companies for managerial and technical personnel to assist in its business and accordingly the employees are selected by the group company and they would be transferred to Appellants.

b) The employees shall act in accordance with the instructions and directions of Appellants. The employees would devote their entire time and work to the employer seconded to.

c) The seconded employees would continue to be on the payroll of the group company (foreign entity) for the purpose of continuation of social security/retirement benefits, but for all practical purposes, Appellants shall be the During the term of transfer or secondment the personnel shall be the employee of Appellants. Appellants issue an employment letter to the seconded personnel stipulating all the terms of the employment.

d) The employees so seconded would receive their salary, bonus, social benefits, out of pocket expenses and other expenses from the group

e) The group company shall raise a debit note on Appellants to recover the expenses of salary, bonus and the Appellants shall reimburse the group company for all these expenses and there shall be no mark-up on such reimbursement.”

As a matter of fact, the assessee issues the prescribed forms to the seconded employees, in terms of the Income Tax Act, 1961 (hereafter “IT Act”). Those individuals too file income tax returns and contribute to the provident fund. Furthermore, NOS remits the above amounts in foreign exchange, which are reflected in its financial statements. The assessee is reimbursed (by the foreign entity, Northern Trust Company – hereafter described as such) for the amounts it pays as salaries, to these seconded employees. The assessee pays for certain services received from the group companies. The assessee used to discharge service tax on payments for such services in terms of Section 66A of the Act. The appropriate major expense heads were ‘Salaries & Allowances’, ‘Relocation expenses’, ‘Consultancy Charges’, ‘Communication Expenses’ and ‘Computer Maintenance and repairs.’

Order of Assessing officer-:

The revenue issued four show cause notices alleging that the assessee failed to discharge service tax under the category of “manpower recruitment or supply agency service” with regard to certain employees who were seconded to the assessee by the foreign group companies.

The Assessing officer passed The Commissioner confirmed the demand, holding that

1) firstly, providing skilled manpower, on secondment basis, is manpower recruitment or supply agency service in the meaning of Section 65(68) read with Section 65(105) (k) of the Act.

2) Secondly, the group companies and their various branches abroad, would be the service providers and the assessee, who receives skilled manpower, on secondment basis, is the service recipient.

3) Thirdly, the definition of manpower recruitment or supply agency, under Section 65(68) has no exclusion clause, requiring service providers to possess the status of certain specified persons or organizations, for the purpose of providing the taxable service of manpower, recruitment or supply

4) fourthly, that in a secondment arrangement a secondee would continue to be employed by the original employer during the secondment, and will, following its termination return to the seconder/ original employer. As a consequence of this, the secondee does not become integrated into the host’s organization.

5) Fifthly, the service provider’s obligation ceases once employees were recruited and seconded. Hence the liability of service tax under Section 65 (105) (k) would be triggered at that event.

6) Sixthly, it was held that there is no exclusive provision in law that restricts taxability of service of manpower recruitment or supply agency, when salaries are drawn by the assessee for manpower so supplied and TDS under the Income Tax Act had been

Regarding differential service tax liability, mere worksheets without documentary proof would be insufficient to grant relief as against the service tax of ₹ 41,11,473/- for the period 2008-2009.

The impugned order of CESTAT

The conclusion paragraph is reproduced herein-below;

13. In view of our discussion above, by following the ratios of the various decisions cited supra, we allow the appeals of the assessee and dismiss the appeal of the Department and we also remand the matter only for the limited purpose as observed above and cross objections in the Department’s appeal filed by the appellant are also accordingly disposed of. (Order pronounced in the open court on 23.12.2020)

In this case, the second appeal against the order of CESTAT lies before Supreme court as it involves question of classification of goods or services or both.

Thus, the appeal against the order of CESTAT was heard by a larger bench of Supreme Court.

Happenings before Supreme court

Contention of revenue

Application of legislation to Facts Reference to judicial precedents
i. The activity of providing skilled manpower, on secondment basis, which works under the supervision and control of the Appellant for a fixed period of time on temporary basis, to the Appellant, falls in the domain of the manpower recruitment or supply agency service within the meaning of Section 65(68) read with Section 65(105) (k) of the Finance Act, 1994;

ii. The group companies and their various branches / subsidiaries abroad, as the case may be, would be the service provider and the Appellant, who receives the skilled manpower, on secondment basis, would be the service recipient.

iii. There are no exclusion clauses in the definition of manpower recruitment or supply agency, under Section 65(68) of the Finance Act, 1994, that the service provider should possess the status of certain specified person or organization, for the purpose of providing the taxable service of manpower, recruitment or supply agency as defined under Section 65(105)(k) of the Finance Act, 1994.

iv. The idea behind secondment arrangement is that the secondee will remain employed by the original employer during the secondment, and will, following the termination of the secondment return to the seconder as a consequence of which the secondee does not become integrated into the host’s organization.

v. The obligation of the service provider would cease once employees were recruited and seconded. Hence the liability of service tax under Section 65 (105)(k) would be triggered at that event.

vi. There is no exclusive clause in the Finance Act, 1994 that restricts the taxability of service of manpower recruitment or supply agency, when salaries were drawn by the Appellant in respect of the manpower so supplied and TDS under Income Tax, 1961 had been effected thereof.

He also submitted that the consideration under Section 67 of the Finance Act, 1994 is that amount which is (a) charged by the service provider on the service recipient, (b) for the provision of service provided to the service recipient and (c) should flow from the service recipient to the service provider but in the present case there is no consideration charged by the foreign company on the appellant for providing the supply of manpower as alleged by the Department and confirmed by the impugned order. He also submitted that even the Commissioner in Para 5.16(c) of his order records that “I find from Form-15 CB, Form-15 CA prescribed under Section 195(6) of the Income Tax Act, 1961 and the Debit Notes placed before me along with the aforesaid SCN that there exists remittance by the assessee to M/s TNTC, towards the reimbursement of expenses pertaining to expat salary” and hence the gross amount charged by the foreign entity is Nil and consequently the values is also Nil. For this submission, the learned Counsel relied upon the decision in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. Vs UOI reported at 2013 (29) STR 9 (Del.) = 2012-TIOL-966-HC-DEL-ST. This decision was upheld by the Hon’ble Apex Court reported in 2018 (10) GSTL 401 = 2018-TIOL-76-SC-ST .

He further submitted that foreign company deputing the employee may be considered as a Pure Agent and for an agency which is involved in manpower recruitment or supply agency, the contractual responsibility can only be recruiting the people or supplying people and therefore these companies cannot be described as engaged in providing any service directly or

indirectly for recruitment or supply of manpower.

12.5. Further, the Hon’ble High Court of Gujarat in the case of Commissioner of Service Tax Vs Arvind Mills Ltd, 2014(35) STR 496 – 2014-TIOL-441-HC-AHM-ST has held that even if the actual cost incurred by appellant in terms of salary remuneration and perquisites is only reimbursed by group of companies, there remains no element of profit or finance benefit.

The arrangement is that of the continuous control and the direction of the company to whom the holding company has deputed the employee, such an arrangement is out of the ambit to be called manpower supply service. This Tribunal also in appellant’s own case as decided by Final Order No. 70436/2019 dated 11.10.2019 by relying upon the case of Volkswagen India Pvt. Ltd. Vs. CCE, Pune-I -2014 (34) STR 135(Tri.-Mumbai) = 2013-TIOL-1640-CESTAT-MUM and the above discussed case law has held that the expatriates working under the appellant are the employees of the appellant as there is an employer-employee relationship. As such, there is no supply of manpower service which is rendered to the appellant by the foreign/holding company. As far as short payment of service tax of Rs. 41,11,742 and the interest of Rs. 16,82,810 is concerned, the learned Counsel has submitted that the entire amount totaling Rs. 47,17,537/- (service tax and interest) has been paid vide GAR Challan and the challans have also been annexed but the learned Commissioner has not considered the same and appropriated the same also. For this discrepancy, we remand the matter to the learned Commissioner to examine the payment of service tax paid by the appellant through various challans and thereafter determine the demand of service tax and interest due from the appellant, if any.

Contention of assessee

Application of legislation to Facts Reference to judicial precedents
i. The employee seconded to the Appellants continue to be on the payroll of their foreign group company only for the purpose of continuation of social security benefits and for all practical purposes the Appellants shall be the employer of such seconded employee;

ii. That during the period of secondment, the employee shall devote the whole of their time, attention and skill to the duties of their secondment;

iii. That each employee shall report and be responsible to the appellants;

iv. That on perusal of the letter of agreement entered into between one of the expatriate employees, namely Brian Ovaert and the Appellants, it is seen that the agreement is entered into between the employee in his personal capacity and not on behalf of foreign company;

v. That the obligation to honor the compensation agreement is squarely on the Appellants only;

vi. That there is no supply of manpower rendered to the Appellants by the foreign holding company and that the method of disbursement of salary cannot determine the nature of the transaction;

vii. That the issue is settled in favour of the assessee in various decisions of the different Tribunals and Courts and therefore the demands proposed in both the Show Cause Notices for the period post 2012 is not sustainable;

viii. That even for the period post 2012, the remittance is a reimbursement based on actuals and there is no amount which is payable in respect of the activity in question and therefore there is no consideration involved;

ix. That in any case, the very definition of service under Section 65B(44) of the Finance Act, 1994 specifically excludes provision of service by an employee to the employer in the course or in relation to his employment and therefore the demand is not sustainable.

Group companies which are basically for provision of certain specialized services and are not related to “supply of manpower” which is evident from various clauses in the Agreements. The employees seconded to India are required to report to the officers of the appellant and such employees are accountable for their performance to the appellant. He further submitted that an employer-employee relationship comes into existence between the appellant and the employees seconded by the group companies abroad and the arrangement will not fall under the taxable service of “manpower recruitment or supply agency” service as defined under the Finance Act, 1994.

He also submitted that the seconded employees are in fact the employees of the appellant and the appellant issues Form-16 to the employees who file their income tax return in India and the appellant also deposits provident fund on behalf of such employees. He further submitted that persons seconded to the appellant work in the capacity of employees and payment of salaries etc is made to such employees by group companies only for disbursement purposes.

This issue is no more res integra and has been settled by various decisions of the Tribunals and the High Courts and upheld by the Hon’ble Apex Court.

We may refer to few of the decisions in the case of Honeywell Technology Solutions Pvt. Ltd. Vs CST, Bangalore, – 2020-TIOL-1277-CESTAT-BANG wherein recently this Tribunal based on same set of facts set aside the demand in as much as there was a distinct employee employer relationship between the seconded employee and the assessee. We also hold that method of disbursement of salary cannot determine the nature of the transaction and this issue was considered in the case of M/s. Volkswagen India Pvt. Ltd. v. CCE, Pune-I reported in 2014 (34) S.T.R. 135 (Tri. – Mumbai) = 2013-TIOL-1640-CESTAT-MUM which has been upheld by the Hon’ble Apex Court in the case of Commissioner Vs Volkswagen India (Pvt.) Ltd. – 2016 (42) S.T.R. J145 (S.C.). We also find that in the case of Computer Sciences Corporation India Pvt. Ltd. v. Commissioner of Service Tax, Noida reported in 2014-TIOL-434-CESTAT-DEL as affirmed by Commissioner of Central Excise v. M/s Computer Science Corporation India Pvt. Ltd. 2015 (37) S.T.R. 62 (All.) = 2014-TIOL-1896-HC-ALL-ST wherein the facts of the case were similar to the present case. The Hon’ble High Court of Allahabad has dealt with the same issue and has held as under: 

“8.In the present case, the Commissioner clearly missed the requirement that the service which is provided or to be provided, must be by a manpower recruitment or supply agency. Moreover, such a service has to be in relation to the supply of manpower. The assessee obtained from its group companies directly or by transfer of the employees, the services of expatriate employees. The assessee paid the salaries of the employees in India, deducted tax and contributed to statutory social security benefits such as provident fund. The assessee was also required to remit contributions, which had to be paid towards social security and other benefits that were payable to the account of the employees under the laws of the foreign jurisdiction. There was no basis whatsoever to hold that in such a transaction, a taxable service involving the recruitment or supply of manpower was provided by a manpower recruitment or supply agency. Unless the critical requirements of clause (k) of Section 65(105) are fulfilled, the element of taxability would not arise.

The issue is no more res integra as the Supreme court itself has decided the matter in favour of assessee in following cases

  • Commissioner of Central Excise v. M/s Computer Science Corporation India Pvt. Ltd. 2015 (37) S.T.R. 62 (All.) = 2014-TIOL-1896-HC-ALL-ST 
  •  Commissioner v. Volkswagen India (Pvt.) Ltd. – 2016 (42) S.T.R. J145 (S.C.).

Analysis and Conclusions

This court, upon a review of the previous judgment in Sushilaben Indravadan (supra) held that there no one single determinative test, but that what is applicable is “a conglomerate of all applicable tests taken on the totality of the fact situation in a given case that would ultimately yield, particularly in a complex hybrid situation, whether the contract to be construed is a contract of service or a contract for service. Depending on the fact situation of each case, all the aforesaid factors would not necessarily be relevant, or, if relevant, be given the same weight.”

Taking a cue from the above observations, while the control (over performance of the seconded employees’ work) and the right to ask them to return, if their functioning is not as is desired, is with the assessee, the fact remains that their overseas employer in relation to its business, deploys them to the assessee, on secondment. Secondly, the overseas employer- for whatever reason, pays them their salaries. Their terms of employment – even during the secondment – are in accord with the policy of the overseas company, who is their employer. Upon the end of the period of secondment, they return to their original places, to await deployment or extension of secondment.

….. The other way of looking at the arrangement is the economic benefit derived by the assessee, which also secures specific jobs or assignments, from the overseas group companies, which result in its revenues. The quid pro quo for the secondment agreement, where the assessee has the benefit of experts for limited periods, is implicit in the overall scheme of things.

As regards the question of revenue neutrality is concerned,……

60. This court is also of the view, for similar reasons, that the orders of the CESTAT, affirmed by this court, in Volkswagen and Computer Sciences Corporation, are unreasoned and of no precedential value.

 1) Commissioner of Central Excise v. M/s Computer Science Corporation India Pvt. Ltd. 2015 (37) S.T.R. 62 (All.) = 2014-TIOL-1896-HC-ALL-ST

2) Commissioner Volkswagen India (Pvt.) Ltd. – 2016 (42) S.T.R. J145 (S.C.).

61. In view of the above discussion, it is held that the assessee was, for the relevant period, service recipient of the overseas group company concerned, which can be said to have provided manpower supply service, or a taxable service, for the two different periods in question (in relation to which show cause notices were issued).

Conclusions

65.  It is held, for the foregoing reasons, that the assessee was the service recipient for service (of manpower recruitment and supply services) by the overseas entity, in regard to the employees it seconded to the assessee, for the duration of their deputation or secondment. Furthermore,…..

Impact under other Laws

Import of services – FTS / FIS

1) Now the secondment of employees by an overseas entity to an Indian entity will be treated as an import of service.

2) Under GST, it will be exigible for IGST the set of which will be available as input tax credit in accordance with the law.

3) Under direct taxes, it will have to be tested for fees for technical services or fees for included services u/s 9 r.w.s. 115A and article 12 or 13(in most of the treaties)

Service PE

4) The physical presence of the employees will give rise to Permanent Establishment of the overseas entity. Profit attributable to the work done by said employees will have to be offered to tax in India.

Visa classification

5) Each of the country/ State has got its own foreign policy regarding permissibility or otherwise of foreign nationals being remaining present in the country / state and various aspects thereof.

6) Purpose of the presence along with employment details form a significant part of the policy.

7) On perusal of the judgement, it has ruled as to who will be the employer rather than only the tax treatment in case of secondment. Also refer the observation of SC in para 53 below where it has said that, existence of social security is one of the reasons for the employee to accept the secondment.

Social security taxes

8) Refer Observation of SC in para 53

Facially, or to put it differently, for all appearances, the seconded employee, for the duration of her or his secondment, is under the control of the assessee, and works under its direction. Yet, the fact remains that they are on the pay rolls of their overseas employer. What is left unsaid- and perhaps crucial, is that this is a legal requirement, since they are entitled to social security benefits in the country of their origin. It is doubtful whether without the comfort of this assurance, they would agree to the secondment.

This observation will have significant impact on the levy of social security tax. It may fuel a litigation.

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